20 - Ethereum Opportunity | Chris Burniske

welcome to bankless where we explore the frontier of internet money and internet finance this is how to get started how to get better and how to front run the opportunity this is ryan sean adams i'm here with david hoffman and we are here to help you become more bankless bankless nation we have an absolutely incredible episode for you super honored to have chris berninski on the podcast he doesn't do many podcasts but there were some ideas i think he wanted to talk about specifically with the bankless community

and this is just a killer episode david what stuck out to you chris to me is this quiet thinker who is always lurking in the background just absorbing information and really stitching them together in the ways that make sense to him so when he gives his thoughts it's coming from a place of like patience and contemplation and he in that i think that is really reflected in his like deliberateness in his ideas and so when he comes to bankless and shares what he has been thinking about lately

and what he's seeing going on in the defy world and the greater crypto world at large i take pause and i and i try and and integrate his ideas into into how i'm seeing things and so i have a ton of respect for for chris and the way he thinks and i'm really happy that we were able to get him on the bankless podcast to to kind of share what he's been thinking about especially as the crypto world has seemed to have rounded a corner in the last few months or so yeah he's one of these guys with some uh crypto wrinkles to use a metaphor right

like so he's been in this space for a while got in in his uh 20s but um wrote the ringing the bell on a new asset class in 2014 2015-ish which was a um like a incredible paper uh for its time way ahead of things so he he's kind of he's got this wisdom that's built up in crypto and having witnessed a few market cycles uh and that certainly comes through when we talk to him about where we are in the market cycle we ask him about eth

specifically we ask him about defy tokens we we talked to him about um economic bandwidth and um what these new capital assets can mean for the world so this is um no this is like an episode that ties a lot of things together that we've talked about previously but also projects forward like if you want to hear what the next three to four years are going to look like starting now i feel like this is the perfect episode to start with it's very obvious

that chris has uh pretty strong convictions about the values of of both himself and these systems at large i think that's really important when it comes to actually looking at as to where these systems are going because if you're in the crypto space uh you are here because of the new values that are instantiated in the code of these protocols and having somebody like chris who has very strong values and very strong convictions about those values who is also a leader in this space in a

way chris is the kind of directing the memes directing the narrative in a way that resonates with his values and the values that he has that he's communicated through his writing i really resonate with so i'm really glad that we have chris in this space kind of leading the thoughts leading the leading the charge into this new world going westward but going in a specific direction that will be good for humanity rather than just bringing about the same old systems in a new form but before we get into the interview we need to talk about some of our bankless sponsors

as we all go westward we need to get our values into the crypto world but hopefully escape the tyranny of centralized rent-seeking institutions and that's where monolith can help you get your value into the crypto world while skipping over the crypto banks coming soon to monolith is an on-ramp directly from your old world bank account into your smart contract wallet on ethereum and for those that don't know monolith also has a defy card which uses dye in your smart contract wallet but on the visa network so you can go to

your grocery store swipe your defy card pay for your groceries like a normal person and still be part of the crypto bankless crypto economic future that we are all excited about so you can get your value from your bank account directly into your crypto visa card without having to go through any crypto bank intermediary which is just absolutely fantastic so in order to get started go to monolith.xyz and get your bankless visa card today so the biggest thing that's holding crypto back is actually getting fiat into the

system moving from that old world to the new crypto world what you have to do is create an account with an exchange you have to wire funds that's also holding your app back if you are a d5 developer and are building something on a network like ethereum what that means is in the fiat process your users drop off when they're signing up and you're limiting your market to the hardcore crypto people but what if you could make it super easy to on ramp to your application using a fiat on-ramp

ramp is that it is a delightfully easy fiat on-ramp it lets first-time crypto users get eat and die usdc whatever asset they want in five minutes or less so this reduces the dropout rate and lets you build products for the real world zurion is using it ethereum is using it taurus is using it d5 apps that you probably know and use today are using it what you need to do is check this out and visit ramp.network to see how easy it is you can get set up in 10 minutes or less

and 100x your addressable market size as a develop this is like the ultimate growth hack and when you mention bankless they'll on ramp the first 100k in us dollars for free so go to ramp dot network mention bankless and get started alright guys let's go ahead and get right into the interview with chris bruniski hello everyone bankless nation we are so excited that we have chris braninski on

the podcast today he is a vc and partner at placeholder he's the author of the book crypto assets he's really the founding father of many of the mental models that we talk about here on bank lists on a weekly basis chris it is fantastic to have you here today how are you doing sir i'm doing great thanks for having me on guys yeah absolutely how how is kovitt going you uh you you're surviving everything that's going on in the east coast there i am surviving um some people know this but i grew up on hawaii

and so i did retreat to the islands for a little bit and i'm back in new york at the moment and new york's a pretty surreal place it's um maybe half as full as it typically is which in some ways makes it more pleasant but then there's the um constant paranoia of contracting kovid although you know it's safer than a lot of the rest of the us at the moment um so it's got its puts in its takes yeah absolutely i guess the nice thing about being immersed in the digital world is we don't have to deal with it with that

sort of thing uh so much so um you know i've been mostly camped in my office i know david's been sort of the same um and uh yeah a different world there but but chris we want to dive right in here we've got so much to talk about today so many cool topics um so i think we should just you know dive in with maybe we could start with what's go i think everyone has your background uh everyone knows your story from previous podcasts and many have read your book you definitely have a big fan following in the bankless community so maybe we

could just talk about what's going on in d5 these days particularly these defy tokens these these almost these proto uh capital assets um you popularized at one point in time in 2017 the like some value uh formulas mv equals pq you know can you talk about capital assets and you know how you're thinking about valuation of them and maybe the evolution of token valuation over time

in the context of these defy tokens definitely the toughest thing here is we're dealing with programmable value right and so the programmability can lead to any kind of value capture and therefore any kind of valuation model and so typically when i'm investigating these things i start off with the super classes of assets from robert greer it's just a formula of looking at the world that i like and those super classes are capital

assets which are an ongoing source of something of value they're valued on the basis of the net present value of uh their expected returns there's consumable so capital assets would be like bonds equities income producing real estate that kind of stuff um there's consumable transformable assets where you can consume it you can transform it into another asset it has economic value but it does not yield an ongoing stream of value um so that's more your typical physical commodities or bitcoin for example or precious metals

and then the third super class are your store value assets so cannot be consumed nor can it generate income nevertheless it has value it is a store value asset so that's like you know fine arts or some of the precious metals like gold overlap into this and certainly bitcoin does so if we look at those three super classes and we say well where does bitcoin fit in that bitcoin really started in the consumable transformable and has bled into being considered store value very

similar to gold and so the equation of exchange mv equals pq um that i did a lot of work with in 2016 and 2017 was really the best attempt at creating price targets for a consumable transformable asset um that has a store of value characteristic and you know typically when you look at your typical commodities which would fall in these consumable transformable buckets um their price floor is the marginal cost of production

and we have seen that be effective actually for btc you know in the bottom of the market in 2015 again in the bottom in 18 2018 and 2019 um you know in 15 marginal cost production was around 200 that's where we bottomed um in 18 and 19. similarly it was in that three four five thousand dollar range so that's a good bottom um and that sticks to prior rules that we know and then it's a bit um more novel to to use mv equals pq to

solve for the necessary size of the monetary base of an economy size pq at velocity v and that's basically what what i was doing uh with the consumable transformables but then um as in in that stands i want to make clear that i think that continues to be the best way to approach the consumable transformable assets that overlap with store value assets though the store of value has a financial premium which makes it very hard to accurately

project the price now if we fast forward to now and we compare now with 2017 there's been a total explosion of stake based assets and so i wrote a piece i guess it was in it was either in 2018 or 2019 that was updating um some of the this valuation work and really focusing on the stake based assets because what became clear to me is a state-based asset is a capital asset

um it it gives you a source of something of value and it will be valued on the basis of the net present value of its expected returns and so what that means is in in particular for a lot of these defy assets anything where i'm staking the asset and i need that asset to perform work to get value flows from the network i can value that using some variant of you know a dcf or a dividend discount model there's different ways um to approach it but it's a much more familiar model say to a traditional

evaluation analyst coming from ecwid the equities world or the bonds world or yeah the bond world and so really wanting to get people to understand okay you can look at these as newfangled capital assets so let me pause there because there's more to go into yeah i don't want to derail from the the defy token conversation because that is definitely this new phenomenon that's going in on in in the d5 world but but first chris i want to talk about uh the three asset classes from from robert

greer that you are um a fan of super classes yeah assets super class yeah because then we have the typical asset classes that we think of underneath those super classes yeah excuse me the the three asset super classes and i use those super classes as a model for understanding eth in in my my talk slash paper the eth is a triple point asset where i made the claim that ethe is perhaps the only asset that fits inside of all three asset super classes and i actually never got your opinion on

whether that uh statement resonated with you or or not so does it it does um and i think it's good branding um i i i mean we're all aware of how important these different shortcuts or memes are so i like the idea of it being a triple triple point asset um i think the silence that you might have felt um for mine typically i'm silent if i'm uncertain about something you know because then i don't want to

put a uninformed opinion out there and the reason i was a little uncertain is we've just never had an asset like that and it's not to say that it can't happen but it is complex in terms of approaching how to value that thing and and what it will be conceived of um now i think that when i look particularly eth 2.0 right there eth will be staked um for consensus and so that will make it a capital asset um and you will be able to

value it on that basis it will have additional demand as a consumable transformable and with this growing understanding of ethos money it will have a financial premium and so on that basis i think you're spot on that's super interesting to get your take on that chris um let's let's switch back to uh the defy assets um conversation so that was a great summary of the three asset super classes right so we've got our capital assets which can be valued as a discounted cash flow dcf type model

right and then we've got um our store value and our consumable assets and that's really the mve equals pq equation was really built for those now it seems like in 2017 the market went a little bit wild with valuing every single token that existed as a mv equals pq type token right as if it's going to become a store of value asset it seems like with the um resurgence of of defy tokens

that actually have these on-chain cash flows we were talking with dan elliser in an episode a couple episodes ago it seems like this is a more healthy type of capital asset because there are actually cash flows associated with these defy tokens like comp or like balancer or like some of the others that are are coming out is that your take too is is the best way to value these defy tokens in that as a capital asset in a discounted cash flow model and does that mean these assets are a bit

um healthier i might use that term than the the asset valuation models we were using in 2017 so i definitely think um there's more fundamentals uh here right and so um the only thing that makes me a little uncomfortable is um using the discounted cash flow idea i was trying to use discounted value flow because a lot of these things you know it's not specifically cash that's flowing and so there is a little bit of extra complexity

in terms of the type of asset that is flowing to the holder be it the native crypto asset or die or some other asset within this realm but it is certainly the case that um there's more fundamentals here and it's more familiar to your traditional analysts and what that means for me is um you know we have these exploding markets of assets and you know when i got started in this industry most people didn't care because most people thought

they were worthless and now a lot of people care because a lot of people think they're valuable but no one knows how to value them and so everyone's trying to figure out how to value them and that was more so the case in 2017 and that that will come back around um we've got kind of our core crypto group that is of course nerding out and fascinating uh fascinated by all this but um as we have more of these models that come out there's this this this phenomenon that starts to happen that's specific to humans um which is

theory is following price so we're creating theories to try and predict these prices but once we create the right theories and they they back test and these models are panning out then price will follow the theory and so then we actually start to build in more price stability um you know less volatility more consistency in these markets so it's actually a critical a critical part of the functioning of these markets that would be able to better value and understand them and that's also very important for you

know the larger scale money that institutional investors that crypto is always talking about um because you know those are the types of conversations i'm having often with placeholders lps around you know how do you value this thing and if people can't get a handle on you know its fundamentals then they're likely to um not be comfortable at least from an institutional basis there's one other thing i want to add here and that's the difference between

say a fundamental evaluation model and a relative valuation model so you know the discounted value flows or let's just call it variance of net present value of flows um those models are fundamental models then there's the whole world of relative valuation models which inequities are things like you know price to sales on a trailing or forward basis or price to earnings or there's there's you know dozens if not hundreds of them what's interesting with um

crypto is you know we had things like um nvt right for the consumable transformables the network value to transaction ratio but now with the capital assets we're seeing things where people are looking at these um from a price to sales or price to earnings basis so you know tokenterminal.xyz now has a ranking where you can look at assets and you can say oh wow this asset is quite cheap in that it's only trading five times earnings going to the supply

cider whereas this other asset is trading at 500 times and so actually what you've seen partially in d5 with some of these assets like bancor or ave or kyber they were valued very cheaply as a multiple of the the value flows going to their supply ciders and so you really had a repricing or um you could call it multiple expansion where you had people realizing oh wow these are capital assets these are solid networks

they're producing these value flows and they're trading you know at one tenth the multiple of their peers and so you have people piling into them and there's basically a repricing to bring those relative valuations more in par and so um i think we can expect to see both a lot more fundamental valuation work and that's kind of the bedrock but then the um say the pricing game with your peers becomes a lot of relative valuation comparisons that has been one of the most exciting things i've seen i would

say in the past you know six months or so this this sort of relative evaluation metrics that we're seeing we will include a link to token terminal in the show notes for folks so they could see that also a couple of articles on bank bankless where we've talked about you know how to how to value it so it almost what you're talking about chris almost is kind of analogous to a price to earnings ratio right that uh people might be used to evaluating in the equities world yeah and it's it's really fascinating it's fantastic that we're getting to this place in crypto and it makes me

super excited and i'm admittedly a nerd for being excited about that um but the the danger here is that we don't standardize and so i actually haven't talked with the token terminal guys but like if you think about it um for this this price to earnings um that they're listing i've got a suspicion that it might actually be more price to sales right because sales is the top line flows to have a price to earnings you would have to be understanding what the margins are of the individual supply

ciders now i think they list it as a price to earnings if i'm not interested um the other thing is you know to create that ratio let's just say price to sales you would have the network value of the assets and you divide it by the value flows um going to the supply ciders now for that network value are you using circulating supply or are you using fully diluted supply right are you using trailing or are you using ford and so

once you start to ask these questions you can see oh you know there's four or there's eight different potential price to sales ratios that i could project and really for a comparison to be useful every single one every single asset has to be computed in the same way and so i think we need you know price to sales off of circulating and off the fully diluted because you'll start to see that will start to reveal kind of what's hidden in the underbelly of coin market cap and some of these sites of you know

okay yeah this asset might look cheap but it's got 90 percent dilution in it because only 10 percent of the supply circulating so we need to standardize and we need now that we're kind of getting the um big overarching ideas we'll have to standardize and become more nuanced in our comparisons and understandings and i totally share your excitement with like the fact that we've gotten to this place is incredibly exciting the fact that we are now talking about the nuances of

relative valuations across different defy and crypto capital assets is incredibly exciting and i think all of that will come you wrote a fairly famous uh paper in the crypto space um talking about the birth of the new asset class and it it feels to me like like we are birthing new asset classes if you will under each of the super asset categories like as we speak i mean the emergence of this capital asset well that's an asset

of defy tokens as capital assets that's an asset under the the capital asset in a super asset category when you originally wrote the paper uh you were talking more about bitcoin right which was more the store value asset are you seeing like essentially what we're doing here is we're digitizing like there's going to be the birth of new assets in in digital form that are crypto native across each of these asset super classes yeah you know it's funny you say that because i have from our notes the new

asset class paper and i had written down i should have titled it bitcoin ringing the bell for new asset classes yes pretty much exactly what you just said yeah i you know i guess if we if we think of blockchains as this 21st century accounting system or blockchain has 21st century accounting systems then i expect all of the traditional assets to get digitized and you know accounted

for and exchanged on these rails and then exactly as you were just alluding to um the creation of new examples within each asset superclass so you know these this capital that we're talking about it's not quite like equity there are some you know really important differences and so you really couldn't call it equities or stocks nonetheless it would still be a capital asset and therefore a new asset class and there will be a bunch that fit that bill

similarly under the consumable transform goals bitcoin is not a commodity um like wheat is the commodity there are some things that are that are quite different about it especially you know you you look at the marginal cost of production tends to go up whereas for most commodities the marginal cost of production tends to go down so you know you're definitely you're you're spot on there um and we're going to have you know these liquid asset soups um kind of floating around as bits on the database

so chris i just have one more we want to get to some other stuff but one more as you said that you kind of jog my memory so my mental model has shifted a little bit away from a bitcoin or an ether being the actual consumable asset itself uh and more toward the block space as being the consumable asset and bitcoin and ether as the currency that is required the protocol mandated currency that is required uh to pay

for the block space i'm wondering what you what you think about that idea so it's it's basically the idea that well the true commodity here the true consumable asset is the ethereum block space itself the gas if you will that's the kind of denomination or the the bitcoin block space and um bitcoin or ether are are more the money more the the currencies that are required to pay for them i'm wondering if that factors into your thought process or what you think about that idea so i see what you're getting at i would

still say they're one and the same um and the analogy that comes to mind is you know let's take gasoline um which is composed of you know different commodities but is this commodity soup um that gasoline then goes into an engine and then runs that engine um but it's still the um the gasoline that is valued and that you buy and that you pay for and that you consume you're you're not consuming the engine directly like you consume the

engine over 10 years or 15 years as the car depreciates and all of that and the reason i'm using that analogy is you know bitcoins block space or ethereum's evm and block space those are the engines and you know bitcoin is the fuel and ether is the fuel to run computation through those engines and so it's the direct value uh the direct valuation of access to those engines so you you're absolutely right that like the utility you're getting out of it comes from the

block space and that computational engine but the fuel that goes into it that values it directly um are these assets the btc so chris i want to turn to another difference between the traditional world of uh equity assets and assets you would find on traditional markets and the assets that we are seeing come around in this uh most recent era of crypto development and i mostly want to focus on fairness and equality with how these

assets are coming to be and maybe compare and contrast them with with the traditional system right and so this new emergence of d5 tokens the the saf g the simple agreement for future governance and the emergence of liquidity mining what these really all are are distribution mechanisms and importantly i i think uh the the compound comp token has had no shortage of headlines but what has had a shortage of headlines in my opinion is that the comp token and the liquidity mining

that is going on with the com token is the compound proto protocol quote unquote going public right and importantly it's going public in a uh using that metaphor it's going public at a way faster rate than what you would find a typical company is on the stock market where there are multiple and multiple and multiple rounds of vc funding that that allow certain special interest groups special people uh privileged people to gain

access to the upside of a certain business right and then finally the public gets to have access to it like last right but compound really just took the shortcut and said like well we're not going to go public on the public stock market we're going to turn the governance over the protocol into this comp token and we're going to allow users to work for this token right and in your article um a blank slate of state which i'm a huge i was a huge fan of and it's definitely going to be included in the

show notes you talked about the need of baking labor into capital and how that can solve some of the rampant wealth inequalities that we find in this world which i think during the times of money printer go bird during coronavirus it's extremely salient so i'm wondering how if i'm if i'm speaking of of the right ideas when it comes to baking capital into or labor into capital uh with this whole liquidity mining phenomenon as like perhaps a first step towards generating a more fair financial system

definitely um and there's a lot to unpack there but um if we look at if we look at bitcoin as kind of the mother of all of this innovation right um bitcoin used a hardcore supply side subsidy um that is the minting of new bitcoin um to capture a bunch of supply ciders to provide security to the network and actually create the service and so what we see compound doing or balancer doing or some